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November 18, 2009
Studies Find Positive Link Between ESG Integration and Investment Performance
    by Robert Kropp

Mercer's second review of academic research into ESG factors again finds that most studies report a positive correlation with financial performance.


In a follow-up to a 2007 review, Mercer has assessed the state of the field of academic research into environmental, social, and corporate governance (ESG) factors, again finding that consideration of ESG factors can lead to positive investment performance.

The new report, entitled Shedding light on responsible investment: Approaches, returns and impacts, assesses 16 academic studies, and in ten cases finds a positive correlation between consideration of ESG factors and financial performance. Only two studies found a neutral-negative impact, while the remaining four found the impact of such considerations to be neutral.

The 2007 review assessed 20 academic studies on the issue, and also found that 10 of the studies reported a positive correlation, while seven reported a neutral effect and three a negative association. That report, entitled Demystifying Responsible Investment Performance , was prepared by Mercer and the Asset Management Working Group (AMWG) of the UNEP Finance Initiative (UNEP FI).

In the November, 2009, review, Mercer reported that "A variety of factors, such as manager skill, investment style and time period, is integral to how ESG factors translate into investment performance."

Mercer found that the impact of ESG factors often varies significantly across industrial sectors, and recommends that research into those factors be conducted at disaggregated levels. Mercer also found evidence that companies are not uniformly disclosing comprehensive information about ESG factors, leading to reliance upon specialist ESG research services for many of the academic studies.

Overall, the studies revealed that consideration of social and corporate governance factors can lead to positive financial performance. The studies of environmental factors found that their materiality varies across industries, underscoring Mercer's recommendation that research be disaggregated.

Academic studies of negative screening techniques have generally concluded that the practice can add value to portfolios. However, according to Mercer, "results are leaning in favor of the value-added proposition of ESG integration."

While most of the studies undertaken thus far have focused on listed equity investments, Mercer found evidence that research is beginning to include other asset classes, and studies of microfinance were included in its report. Mercer also noted that forthcoming research papers will focus on such classes as fixed income and real estate.

 

 
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